MORGAN STANLEY: Many Of Our Clients Are Preparing For An Imminent Loss Of Central Bank Control

The Federal Reserve is
contemplating unwinding its quantitative easing program, which at
$85 billion in bond buying per month has constituted the single
largest provision of marginal liquidity to global financial
markets since this latest iteration of the stimulus program was
launched in September 2012.

Such a move appears imminent – the
consensus in the marketplace is that the first step in
tapering back quantitative easing will be announced at the
conclusion of the Fed's September 18-19 FOMC policy meeting.

This prospect has roiled global stock and bond markets in recent
months, and in response to the increased volatility, the Fed has
sought to reassure investors that it would continue to max out
its other (main, in fact) policy stimulus tool – control over the
level of benchmark interest rates – for years to come.

In that vein, Goldman Sachs chief economist Jan Hatzius expects
the Fed to announce a "dovish taper" at the September meeting.
Though the central bank will begin to taper back quantitative
easing, Hatzius believes it will also find a way to tweak its
"forward guidance" efforts (promises over the future path of
interest rates).

The Goldman economist explained a few of the Fed's options for
tweaking forward guidance
in a recent note.

European Central Bank President Mario Draghi has
experimented with forward guidance in recent
months.REUTERS/Alex
Domanski

And while the Fed is in the spotlight, it's not the only central
bank that is trying to lean more heavily on forward guidance
these days – these "open-mouth operations" are currently all the
rage at the Bank of England, the European Central Bank, and the
Bank of Japan as well.

However, investors don't think central banks will be successful
with these new forward guidance tactics, which are expected to
ramp up soon.

"Most clients I met buy our story that the Fed, the Bank
of England and the ECB will step up their efforts to push back
on expectations of earlier and faster rate hikes in the next
few weeks and months," says Morgan Stanley global head of
economics Joachim Fels in a Sunday note. "However, many doubt
that Bernanke, Carney, Draghi & Co will be successful in
their forward guidance efforts in the face of further
improvements in the economic data."

"Too much is at stake for central banks in terms of
credibility and there are various ways to make forward
guidance more precise and more forceful, including a lowering
of the unemployment threshold and/or the introduction of a
lower threshold for inflation, below which a rate hike will
not be considered," says the Morgan Stanley economist.